“Look Through Equity Mutual Funds Beyond Past Performance “ by Vikas Biyani

Contributed by : Mandar Chapekar, CFA

CFA Society India, Pune hosted a session on “Look Through Equity Mutual Funds Beyond Past Performance “by Vikas Biyani on 23^rd March 2018. Vikas heads Client Advisory team at Multi-Act. He has 14+ years of experience in the field of equity research, capital markets and portfolio advisory to high net-worth and institutional clients.  He has been associated with Multi-Act since 2003. He has earned his Chartered Accountancy qualification from ICAI in 2003. He is also pursuing his CFA (L-3 Candidate).

The Crux of the Topic was, while selecting Equity Mutual Funds for investment purpose, various factors to be analyzed, considered by Investor or Financial Advisor apart from just focusing on past performance criteria

Vikas initially started off with discussion by providing statistics on  huge inflows of funds coming into Equity Mutual Funds in recent period and its impact on Market, Performance of Equity MFs especially on Small cap and Mid cap Funds

Thereafter Vikas went on to discuss why past performance should not be the only criteria for selection of mutual funds He elaborated , Mutual Funds themselves mention that past performance is not guarantee of future results . Vikas provided illustration of how Funds selected based on last 3 years performance performed in next 3 Years.  The result was only 1 or 2 funds selected on 3 years past performance basis   appeared in top 10 funds in next 3 years -time period. He also referred to famous Dalbar Study done in US to support the illustration. Again he mentioned about hindsight bias affecting decision making while selecting Equity Mutual Fund based on Past Performance

He further discussed on general disclaimer of Mutual Funds i.e.  Mutual Fund Investments are subject to Market Risk. He explained his definition of Market Risk i.e.

Market Risk =Quality + Valuations + Technicals

Vikas mentioned that Investor need to think of his/her investment objective i.e. whether the priority is performance or safety first or Momentum or Value.  Accordingly Equity Mutual Fund need to be selected.  One Size Fits All” criteria does not work well over here.

Again Investors suffer from various biases while selecting Mutual Funds viz. Chasing Fads, Hindsight bias , Loss Aversion bias and Urge to act.  They need to take cognizance of these biases

Vikas explained that while selecting Equity Mutual Fund one should consider

• Consistency in performance rather than recent performance. Again while calculating consistency, rolling period returns can be used to mitigate starting and ending point bias
• Quality of Portfolio holdings of Equity Mutual Funds Schemes. Funds having exposure to ow quality businesses need to be avoided. Funds having low Drawdowns in Bear Market Phase need to be selected
• Mutual Funds Schemes having lower/reasonable Valuation (but not at the cost quality) need to be considered as the valuations drive the potential return on the investment. Simple Valuation Metrics like P/E can be used to compare different Mutual Fund schemes
• Expense Ratio of the Fund need to be considered. Funds having not too high expense ratio need to be considered
• Funds having not too high portfolio turnover can be considered
• Process Driven Funds rather than Manager driven Funds can be considered
• Need to consider Absorption Capacity of Mutual Fund scheme based on Size of AUM and Mandate of the scheme
• Need to consider Style drift if any of Fund Manager as against stipulated mandate as per the Fund’s objective

Vikas elaborated all above aspects   with apt and real life illustrations which made the session really interesting.

Vikas also provided details of guidelines, SEBI has recently issued to Mutual Funds regarding categorization and rationalization of Mutual Funds Schemes.  The aforesaid guidelines are likely to bring significant change in Mutual Fund Industry.   The impact of implementation of these guidelines may prove past performance of Mutual Fund schemes not very useful. In this scenario, Analysis of Mutual Fund schemes beyond past performance would be critical

All in all it was very good informative and educative session full of real life illustrations which would help attendees to take Rational Investment Decisions while selecting Equity Mutual Fund Schemes